Non-performing note buyout

Tax Liens & Mortgage Notes
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Non-performing note buyout

Kevin Romines
Lender · Winlock, WA · Member since 2013 · 1k+ posts · 1k+ votes

I have a friend of mine that has been looking at a house that he wants to get. The owner has passed and the wife is not on title. The wife and husband were married years ago and then got a divorce, they never got remarried, but have been together for many years since then. So she's not on title, and he is not sure if there was a will? I suggested that he contact the lender and consider buying out the 1st lien position. The wife has told my friend that she's walking away from this home as its underwater with 2-3 mortgages and several judgements.

The 1st has 55K owing on it and the total of all liens is between 250-300K yet the house is worth 200K. If my friend buys out the 1st mortgage lender, and then forecloses on the property, does he get to set the minimum opening bid at the auction at the amount owning by all liens on the property, or just his 1st mortgage lien position?

If he can set it at the total lien amount, most likely nobody will bid on it and it will revert back to him, thereby wiping out all junior liens and he can now sell the house at a profit. If he can only set the opening bid at what his lien amount of 55K would be, then he only stands to get his 55K. so he would need to buy the lien at a good discount in order to make any money?

Any thoughts or strategies?

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Jerry W.Pro Member
Moderator
Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
12y

@Kevin I am not an expert in foreclosures and many like @Bill Gulley are. Also most states have differences in their foreclosure laws. Here is ny best guess. As first note holder you can bid any amount but you only get the amount of your note, anything above it goes to the 2nd if there is more to the third etc. You cannot get more than you are owed. I would try to buy the 2nd or 3rd note on the place. A non performing 2nd or 3rd is only worth a fraction of what a non performing first is that has huge equity. Why would a bank discount a first mortgage for $55K when the place is worth $200K ? Just my 2 cents, good luck

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  • Derek W.
    Investor · Kern county Riverside County, CA · Member since 2008 · 494 posts · 261 votes
    12y

    Foreclosure sales are different from state to state. We will need an expert from the state the property is located (I assume Washington?) to get a specific answer. But in California, the note holder sets the opening bid. What you mentioned would be a valid way of getting a discounted property by having junior liens wiped out at foreclosure sale.

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  • Jerry W.Pro Member
    Moderator
    Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
    12y

    @Kevin I am not an expert in foreclosures and many like @Bill Gulley are. Also most states have differences in their foreclosure laws. Here is ny best guess. As first note holder you can bid any amount but you only get the amount of your note, anything above it goes to the 2nd if there is more to the third etc. You cannot get more than you are owed. I would try to buy the 2nd or 3rd note on the place. A non performing 2nd or 3rd is only worth a fraction of what a non performing first is that has huge equity. Why would a bank discount a first mortgage for $55K when the place is worth $200K ? Just my 2 cents, good luck

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    Jerry beat me, didn't see his post, and as usual he nailed it IMO.

    Kevin, it doesn't really work out that way as the 1st lien holder must give notices. Junior lien holders will probably jump in taking that 1st out. He can only bid in his interests. But probably the junior holders would probably be bidding in amounts to cover the first paying proceeds to clear them. There could be a tail end lien holder that may lose out if they don't protect their interests. You need to check with your attorney and foreclosure proceedings in that state. At 55K on a 200K you won't be walking away a winner I'm sure. Even if you did, the property sells and overages go to the borrower's estate. The only way to keep the property is to obtain a deed in lieu of foreclosure.

    There are still issues here, common law marriages, estate issues, heirs, as a lender/note holder you may be able to clear these issues with foreclosure if the folks don't fight you on it, but you'd be selling and excess amounts would go to the estate, who could give a deed with that mess? See an attorney before jumping on this, goes for your friend too. :)

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  • Derek W.
    Investor · Kern county Riverside County, CA · Member since 2008 · 494 posts · 261 votes
    12y

    For learning purposes, let me simplify the OP to make sure I understand.

    House worth $200,000

    Two (or Three) loans against the house

    1st for $55,000

    Second for $200,000ish

    If someone were able to purchase the first and become the note holder, they could foreclose if payments aren't made. The note holder can set the opening bid.

    Question 1. Can the opening bid be set for more than the face value of the loan?

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    Yes, usually covered in state law, the second holder might join the first, the second must be given notice. Overages off the 1st will go to the second. If they place is underwater it may sell for less, say 150K, the second may then seek a judgment, in this case against the estate. Say it doesn't sell, the second can take out the first and list it. Two banks could agree to list and clear both debts. Neither can keep any excess funds. There are also redemption rights. So knowledge of state law is essential, unlikely anything will go to anyone other than the note holders. To make money here you'd buy the second at a discount. Money comes in from the discount from the sale, no excess amounts if it's underwater, but if there were that goes to the owner/borrower after paying off the full balance and costs. The only way to get title is obtaining a deed from the borrower/owner and here you have estate issues, so that dust would need to settle before going there. I have no idea how WA washes this out, this is generally the flow. :)

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    12y

    There's nothing to stop any lien holder in outbidding any other bidder at foreclosure auctions. Usually the bank does not want another REO so they want somebody to outbid the bank's bid; but if you want a property just keep bidding until all other bidders stop bidding. It's just that simple.

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  • Account Closed
    Dallas, TX · Member since 2013 · 4k+ posts · 744 votes
    12y

    The home owner should not get a dime if there is an overages because they sponge of the lender rent free for a long time.


    My 2cents,


    Joe Gore

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  • Derek W.
    Investor · Kern county Riverside County, CA · Member since 2008 · 494 posts · 261 votes
    12y

    So if he were to purchase the note for, say, $55,000, can he set an opening bid of $275,000 at the auction, or is the max bid that can be set the value of the loan ($55,000) plus late fees and legal fees?

    If you show up at the auction and bid, you would have to pay the overage to the second beyond your $55,000. And wouldnt the second would most likely bid to protest their interest.

    I've only discounted my notes from face value at the trustee sale auction, so I haven't run into this scenario.

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  • Rick H.
    Lender · Greater LA/Orange County area, CA · Member since 2012 · 3k+ posts · 3k+ votes
    12y

    Better chance of buying a second, and at a big discount. Or offer to collect on 2nd as JV agreement.

    For those who didn't read prior thread, @Derek W's cogent summary of facts. Remember, owner/borrower is deceased. Doubt if anyone can sue the estate for a deficiency judgment on what is probably non-recourse paper.

    Here's the easiest profitable play: buy the 2nd for heavy discount. Start Foreclosure non-judicially. Advance payoff on 1st at last minute to chill sale. Watch your numbers. Decide whether you want the real estate or the just the profit. Either is ok in my book.

    Many people would be offended by offering to reward them should things work out profitably. Personally, I'm not that easily offended and I'm an big fan of Starbucks (they're all over the place...really).

    Good luck (now that I'm a stakeholder in this deal turning out right for you!).

    1Reply
  • Kevin Romines
    OP
    Lender · Winlock, WA · Member since 2013 · 1k+ posts · 1k+ votes
    12y

    Great info guys. My thought for him was if he set the opening bid so high that no one would bid, thereby reverting the property back to the foreclosing lender, him as the 1st mortgage lender. Would that wipe the junior liens out, or would the 1st lien holder be responsible to pay the junior liens for the difference between the opening bid and the amount owed on the 1st. If so that would be pointless.

    I will mention to him the thought of buying out the 2nd lien approach, could be a good idea. Love the thought of entering into a JV agreement to collect on the 2nd. If done correctly could be a great way to collect without a lot of skin in the game. The property is in Washington which is a non-judicial state and I believe no redemption rights ( I could be wrong about though).

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    Kevin, buying the second is an option as I and Rick mentioned.

    Your tactics in setting a high price have consequences with the junior holder, amounts owing are governed by law. As Steve mentioned you can bid, but that too has consequences, you will likely be bidding for the junior lien holder, not wiping them out. If you and your friend have funds to buy a note or go to a cash sale, you have funds to seek legal advice, I suggest you not speculate on strategy and act upon internet opinions. :)

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  • Kevin Romines
    OP
    Lender · Winlock, WA · Member since 2013 · 1k+ posts · 1k+ votes
    12y

    I fully agree with you Bill. He hired a foreclosure attorney last week to consider this whole transaction. He has emailed with him a little so far, but his 1st meeting is up coming. The foreclosure attorney can also negotiate with lenders for the note purchase, so I will point my buddy to this thread for the great info it has in it.

    Thanks for the info guys. If anyone has additional thoughts I would love to hear them. I get really charged up with creative ideas like we discussed,

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